Income Taxes

12 Months Ended

Dec. 31, 2019

Note 16. Income Taxes

On August 6, 2019, Switzerland published changes to its Federal tax law in the Official Federal Collection of Laws. On September 27, 2019, the Zurich Canton published their decision on the September 1, 2019 Zurich Canton public vote regarding the Cantonal changes associated with the Swiss Federal tax law change. The intent of these tax law changes was to replace certain preferential tax regimes with a new set of internationally accepted measures that are hereafter referred to as "Swiss tax reform". Based on these Federal/Cantonal events, our position is the enactment of Swiss tax reform for U.S. GAAP purposes was met as of September 30, 2019, and we recorded the impacts in the third quarter 2019. The net impact was a benefit of $767 million, which consisted of a $769 million reduction in deferred tax expense from an allowed step-up of intangible assets for tax purposes (recorded net of valuation allowance) and remeasurement of our deferred tax balances, partially offset by a $2 million indirect tax impact in selling, general and administrative expenses. The future rate impacts of these Swiss tax reform law changes are effective starting January 1, 2020. We will continue to monitor Swiss tax reform for any additional interpretative guidance that could result in changes to the amounts we have recorded.

On December 22, 2017, new U.S. tax reform legislation ("U.S. tax reform") was enacted that included a broad range of complex provisions impacting the taxation of businesses. Certain impacts of the new legislation would have generally required accounting to be completed and incorporated into our 2017 year-end financial statements, however in response to the complexities of this new legislation, the SEC issued guidance to provide companies with relief. The SEC provided up to a one-year window for companies to finalize the accounting for the impacts of this new legislation. We finalized our accounting for the new provisions during the fourth quarter of 2018. U.S. tax reform resulted in a total transition tax liability of $1,284 million ($1,279 million as of December 31, 2018 and $5 million of 2019 related updates) based on the deemed repatriation of our accumulated foreign earnings and profits, which will be paid in installments through 2026, and a related change in our indefinite reinvestment assertion for most companies owned directly by our U.S. subsidiaries. In addition, the legislation reduced the U.S. federal tax rate from 35% to 21% and established various new provisions, including a new provision that taxes U.S. allocated expenses (e.g. interest and general administrative expenses) as well as currently taxes certain income from foreign operations (Global Intangible Low-Tax Income, or “GILTI”).

Earnings/(losses) from continuing operations before income taxes and the provision for income taxes consisted of:



	For the Years Ended December 31,
	2019			2018			2017
	(in millions)
Earnings/(losses) from continuing operations before income taxes:
United States	$	751		$	(170	)	$	354
Outside United States	2,696			3,012			2,770
	$	3,447		$	2,842		$	3,124
Provision for income taxes:
United States federal:
Current	$	145		$	(34	)	$	1,322
Deferred	97			171			(1,274		)
	242			137			48
State and local:
Current	29			23			32
Deferred	45			61			30
	74			84			62
Total United States	316			221			110

Outside United States:
Current	459			552			541
Deferred	(773		)	—			15
Total outside United States	(314		)	552			556

Total provision for income taxes	$	2		$	773		$	666

The effective income tax rate on pre-tax earnings differed from the U.S. federal statutory rate as follows:



	For the Years Ended December 31,
	2019		2018		2017
U.S. federal statutory rate	21.0	%	21.0	%	35.0	%
Increase/(decrease) resulting from:
State and local income taxes, net of federal tax benefit	1.3	%	0.4	%	0.8	%
Foreign rate differences	0.2	%	(1.9	)%	(10.8	)%
Changes in judgment on realizability of deferred tax assets	(0.3	)%	(0.4	)%	3.2	%
Reversal of other tax accruals no longer required	(3.0	)%	(1.8	)%	(1.7	)%
Tax accrual on investment in Keurig (including tax impact of the gain from the KDP transaction)	0.8	%	8.4	%	1.2	%
Excess tax benefits from equity compensation	(1.2	)%	(0.8	)%	(1.2	)%
Tax legislation (non-U.S. and non-Swiss tax reform)	0.4	%	0.3	%	(2.6	)%
Swiss tax reform	(22.3	)%	—		—	%
U.S. tax reform - deferred benefit from tax rate change	—		—		(41.5	)%
U.S. tax reform - transition tax	0.1	%	(1.3	)%	42.2	%
U.S. tax reform - changes in indefinite reinvestment assertion	—		2.1	%	(2.0	)%
Foreign tax provisions under TCJA (GILTI, FDII and BEAT)⁽¹⁾	2.5	%	1.1	%	—
Other	0.6	%	0.1	%	(1.3	)%
Effective tax rate	0.1	%	27.2	%	21.3	%


(1)	The Tax Cuts and Jobs Act of 2017 ("TCJA") established the Global Intangible Low-Tax Income ("GILTI") provision, which taxes U.S. allocated expenses and certain income from foreign operations; the Foreign-Derived Intangible Income ("FDII")

provision, which allows a deduction against certain types of US taxable income resulting in a lower effective US tax rate on such income; and the Base Erosion Anti-abuse Tax ("BEAT"), which is a new minimum tax based on cross-border service payments by U.S. entities.

Our 2019 effective tax rate of 0.1% was significantly impacted by the $769 million net deferred tax benefit related to Swiss tax reform in the third quarter of 2019. Excluding this impact, our 2019 effective tax rate was 22.4%, which reflects unfavorable provisions from U.S. tax reform and taxes on earnings from equity method investments (these earnings are reported separately on our consolidated statements of earnings and not within earnings before income taxes), largely offset by favorable impacts from the mix of pre-tax income in various non-U.S. jurisdictions and discrete net tax benefits of $176 million. The discrete net tax benefits were primarily driven by a $128 million net benefit from the release of liabilities for uncertain tax positions due to expirations of statutes of limitations and audit settlements in several jurisdictions.

Our 2018 effective tax rate of 27.2% was unfavorably impacted by net tax expenses from $128 million of discrete one-time events as well as unfavorable provisions within the new U.S. tax reform legislation and taxes on earnings from equity method investments (these earnings are reported separately on our consolidated statements of earnings and not within earnings before income taxes), partially offset by the favorable mix of pre-tax income in various non-U.S. tax jurisdictions as well as the reduction in the U.S. federal tax rate. The discrete net tax expenses included a $192 million deferred tax expense related to a $778 million gain on the KDP transaction reported as a gain on equity method investment as well as $19 million expense from the final updates to the provisional impacts from U.S. tax reform reported as of 2017 year-end, partially offset by an $81 million benefit from favorable audit settlements and statutes of limitations in various jurisdictions.

Our 2017 effective tax rate of 21.3% was favorably impacted by the mix of pre-tax income in various non-U.S. tax jurisdictions and net tax benefits from $97 million of discrete one-time events, partially offset by domestic earnings taxed at the higher pre-U.S. tax reform rate of 35% as well as taxes on earnings from equity method investments (these earnings are reported separately on our consolidated statements of earnings and not within earnings before income taxes). The discrete net tax benefits included the provisional net impact from U.S. tax reform discussed previously, favorable audit settlements and statutes of limitations in various jurisdictions, and the net reduction of our French and Belgian deferred tax liabilities resulting from tax legislation enacted during 2017 that reduced the corporate income tax rates in each country, partially offset by the addition of a valuation allowance in one of our Chinese entities.

Tax effects of temporary differences that gave rise to deferred income tax assets and liabilities consisted of:



	As of December 31,
	2019			2018
	(in millions)
Deferred income tax assets:
Accrued postretirement and postemployment benefits	$	150		$	147
Accrued pension costs	272			349
Other employee benefits	160			147
Accrued expenses	287			283
Loss carryforwards	589			707
Tax credit carryforwards	729			747
Other	438			302
Total deferred income tax assets	2,625			2,682
Valuation allowance	(1,243		)	(1,153		)
Net deferred income tax assets	$	1,382		$	1,529
Deferred income tax liabilities:
Intangible assets, including impact from Swiss tax reform	$	(2,772	)	$	(3,861	)
Property, plant and equipment	(663		)	(473		)
Other	(559		)	(492		)
Total deferred income tax liabilities	(3,994		)	(4,826		)
Net deferred income tax liabilities	$	(2,612	)	$	(3,297	)

Our significant valuation allowances are in the U.S., Switzerland and China. The U.S. valuation allowance relates to excess foreign tax credits generated by the deemed repatriation under U.S. tax reform while the Swiss valuation allowance brings the allowed step-up of intangible assets recorded under Swiss tax reform to the amount more likely than not to be realized. The valuation allowance in China relates to character-specific deferred tax assets of one of our Chinese entities.

At December 31, 2019, the Company has pre-tax loss carryforwards of $3,491 million, of which $691 million will expire at various dates between 2020 and 2039 and the remaining $2,800 million can be carried forward indefinitely.

The unremitted earnings as of December 31, 2019 in those subsidiaries where we continue to be indefinitely reinvested is approximately $1.6 billion. We currently have not recognized approximately $75 million of deferred tax liabilities related to those unremitted earnings. Future tax law changes or changes in the needs of our non-U.S. subsidiaries could require us to recognize deferred tax liabilities on a portion, or all, of our accumulated earnings that are currently indefinitely reinvested.

The changes in our unrecognized tax benefits were:



	For the Years Ended December 31,
	2019			2018			2017
	(in millions)
January 1	$	516		$	579		$	610
Increases from positions taken during prior periods	27			36			33
Decreases from positions taken during prior periods	(35		)	(43		)	(93		)
Increases from positions taken during the current period	50			57			64
Decreases relating to settlements with taxing authorities	(64		)	(45		)	(54		)
Reductions resulting from the lapse of the applicable statute of limitations	(64		)	(31		)	(29		)
Currency/other	(4		)	(37		)	48
December 31	$	426		$	516		$	579

As of January 1, 2019, our unrecognized tax benefits were $516 million. If we had recognized all of these benefits, the net impact on our income tax provision would have been $463 million. Our unrecognized tax benefits were $426 million at December 31, 2019, and if we had recognized all of these benefits, the net impact on our income tax provision would have been $364 million. Within the next 12 months, our unrecognized tax benefits could increase by approximately $30 million due to unfavorable audit developments or decrease by approximately $140 million due to audit settlements and the expiration of statutes of limitations in various jurisdictions. We include accrued interest and penalties related to uncertain tax positions in our tax provision. We had accrued interest and penalties of $180 million as of January 1, 2019 and $170 million as of December 31, 2019. Our 2019 provision for income taxes included $5 million benefit for interest and penalties.

Our income tax filings are regularly examined by federal, state and non-U.S. tax authorities. U.S. federal, state and non-U.S. jurisdictions have statutes of limitations generally ranging from three to five years; however, these statutes are often extended by mutual agreement with the tax authorities. The earliest year still open to examination by U.S. federal and state tax authorities is 2016 and years still open to examination by non-U.S. tax authorities in major jurisdictions include (earliest open tax year in parentheses): Brazil (2014), China (2009), France (2015), India (2005), Russia (2013) and Switzerland (2014).